Global property equities: going the distance

03/12/2018

Download

Tim Gibson, director and co-portfolio manager for global property equities, is keeping a close eye on US interest rates. He also notes that disruption, while presenting risks, is also unearthing opportunities for property equities investors.


Will global property equities continue to underperform?

Even though equity and bond markets began to consider the possibility of interest rate rises in the US in May 2013, it took another two and half years before we saw rates actually rise in Dec ember 2015. Since then we have had 8 interest rate rises in total with the futures markets pricing in several more.

Markets, by their nature, are forward looking, reacting to news that is better or worse than relative expectations. The recent Q3 2018 results in the US saw cracks beginning to appear in corporate America as industrial companies, including heavy machinery company and well as technology companies delivered weaker than expected results. This was caused, in part, by rising input prices as the impact from higher wages, interest costs and trade tariffs began to bite.

This opens the door to the possibility that US equity market earnings growth may be peaking with the prospect of downgrades to come.

If earnings growth is slowing then a key question for 2019 would be: has the interest rate cycle in the US peaked? If the answer is yes then this would be very positive for REITs, as investors focus on companies with good earnings and dividend transparency. In addition to this we still forecast continued earnings growth with well covered dividends for REITs.


What challenges do we face within our sector?

Rising interest rates haven’t been the only challenge for the sector. Structural changes have been happening in retail leading to winners and losers. Indeed the range of earnings growth within the real estate sectors has, in our view, never been wider. As real estate investors who believe in being active managers, this excites us.

Technological change, rapid urbanisation and shifts in demographics are fundamentally altering consumer behaviours and redefining the needs and uses for real estate. The rise of e-commerce has changed the face of retail and epitaphs have long been written about the death of shopping malls. However, the growth of e-commerce has fuelled demand for modern logistics space as traditional warehouse ‘sheds’ have turned into new shops of the world. E-commerce can require as much as 3x more logistics space than traditional brick-and-mortar retailers and strategically located logistics assets are becoming more important in order to fulfil ever increasing expectations of the speed of online delivery. The record set in San Francisco was 8 minutes, from click to delivery!


What opportunities exist and how are we positioned for these?

These trends are always gradual and rarely happen overnight, but we are very selective in our holdings of retail landlords in recent years, focusing only on best in class operators which we believe have embraced this structural shift and have actively adapted in order to emerge as winners.

On the other hand, we have increased our positions in global logistics developers who are at the forefront of the development of modern logistics, how many parcels will arrive at your house these holidays?

We have also positions in a number of Data Centers and Tower companies were we expect secular growth trends to remain highly favourable for the foreseeable future.

Finally, on a country level, we see further upside in companies offering affordable and flexible housing in growing markets such as Germany, the Philippines and burgeoning cities within the US.


Where could we be wrong?

Clearly if the long end of the yield curve rises faster than expected, possibility due to better economic data, this would put further downward pressure on the sector. Alternatively, if the yield curve were to invert, implying an impending economic correction, then this would negatively impact share price performance.



Which themes have the potential to redirect markets in 2019? Download our one-pager summary to find out




Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

For promotional purposes.

Anything non-factual in nature is an opinion of the author(s), and opinions are meant as an illustration of broader themes, are not an indication of trading intent, and are subject to change at any time due to changes in market or economic conditions. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. No forecasts can be guaranteed and there is no guarantee that the information supplied is complete or timely, nor are there any warranties with regard to the results obtained from its us.


Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Asia-Pacific Property Equities Fund

Specific risks

Risk rating

Janus Henderson Global Property Equities Fund

Specific risks

Risk rating

Janus Henderson Global Property Income Fund

Specific risks

Risk rating

Janus Henderson Horizon Asia-Pacific Property Equities Fund

Specific risks

  • Investment management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • Derivatives use exposes the Fund to risks different from, and potentially greater than, the risks associated with investing directly in securities and may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • The Fund's value may fall where it has concentrated exposure to a particular industry that is heavily affected by an adverse event.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.
  • The Fund may invest in real estate investment trusts which can involve different risks to investing directly in the underlying assets. Such schemes may increase risk due to factors such as restrictions on withdrawals and less strict regulation. The value of your investment may fall as a result.

Risk rating

Janus Henderson Horizon Global Property Equities Fund

Specific risks

  • Investment management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • Derivatives use exposes the Fund to risks different from, and potentially greater than, the risks associated with investing directly in securities and may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • The Fund's value may fall where it has concentrated exposure to a particular industry that is heavily affected by an adverse event.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.
  • The Fund may invest in real estate investment trusts which can involve different risks to investing directly in the underlying assets. Such schemes may increase risk due to factors such as restrictions on withdrawals and less strict regulation. The value of your investment may fall as a result.

Risk rating

Share

Important message